Precious metal and U.S. dollar start to trade in tandem, but for how long?
Gold's been quite the rebel lately -- and investors are giving it much more than a passing glance.
The precious metal recently broke from its usual inverse relationship with the U.S. dollar to move more in sync with the climb in the greenback, showing off its prowess as a resilient world favorite.
"Gold moving up with the dollar is a sign of tremendous strength in gold," said Sam Kirtley, chief executive officer of SK Options Trading.
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Gold futures prices are up nearly 5% from this month's low of $1,050 an ounce in New York. The U.S. dollar index, which measures the U.S. unit against a trade-weighted basket of six major currencies, has also climbed, gaining more than 2% from its low in February.
"Both gold and the dollar have been trending upward since early this month," said Brien Lundin, editor of Gold Newsletter. "If gold and the dollar can decouple, [that would] hold important implications for the metal going forward."
And those implications are likely to be good for gold. A decoupling in the relationship would mean that "investors are not only buying gold as a U.S. dollar hedge but as a safe-haven asset too, and buying for this reason is so heavy it is outweighing the selling from U.S. dollar strength," said Kirtley.
But the direction of the precious metal and dollar are destined to diverge again -- and when they do, gold may or may not come out a winner.
The global markets are currently focusing on Europe's troubles, feeding a rally in the dollar, yet gold is still trading at around $1,100, said Kirtley. "So if gold can make gains, or even just tread water whilst the U.S. dollar rallies, it will soar if the greenback was to begin to drop."
On the other hand, "even though gold prices have been moving up with gold over the last month, if the U.S. dollar continues rallying, this will eventually flow through to have a negative impact on gold," he said. "In that case, "the biggest possible risk for gold at present is a strong, sustained rally in the U.S. dollar."
Eyes on the Metal
For now, however, the gold market's apparently changing relationship with the dollar deserves a closer look because it can offer hints for gold's next direction.
After all, "we are so used to looking at gold rising when the dollar falls that the concept of gold rising when the dollar rises seems to break the rules," Julian Phillips and Peter Spina, editors at GoldForecaster.com, said in a weekly newsletter sent Tuesday.
In most eyes, it has.
Most daily commentaries blame the inverse relationship between the gold and the dollar as the main reason for gold's moves, said Phillips and Spina.
And that "normal linkage" has been decoupled because of "worries over fiat currencies," leading traders to establish gold positions as protection against an unraveling of fiat currencies, said Charles Nedoss, a metals analyst at Olympus Futures. "This can be referred to as the 'fear trade'."
What's happening now is truly putting gold's durability on display.
"Gold's ability to rise in most major currencies is suggesting people are choosing it as an alternative to paper currencies," said Peter Grandich, a metals writer at Agoracom.com. And people are choosing the precious metal "because of the huge amount of debt the western world has piled up and the belief the only way out from under it is to reflate."
Consider, as well, that around the world, central banks have recently become net buyers of gold. That's likely just the "first inning" of these purchases, said Patrick Kerr, a managing director at Amerifutures Commodities & Options.
The central banks can buy gold now at these price levels or they can do it "later at higher prices, perhaps much higher prices," he said. The "smart" countries looking to buy gold are taking immediate action since "each day that goes by without as much gold as they can get reduces their national wealth as the fiat currencies are devalued."
There are "definitely changes brewing worldwide" and "gold is in transition right now," said Kerr.
"In a world where governments are openly devaluing their fiat currencies in an attempt to ease increasing stimulus debts and increase exports, central banks are figuring out the best way to preserve their wealth: the U.S. dollar and gold. Look for them to trade up together," he said.
However, gold may have an advantage.
Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management, points out that the dollar, which he said is likely to go higher purely for technical reasons covering the carry trade, "will not transform from a funding currency to an investment currency."
Carry trades involve borrowing funds in lower-yielding currencies, such as the dollar, and investing them in assets denominated in higher-yielding currencies. Carry trades are less attractive to investors as their appetite for risk wanes, and they liquidate their positions to avoid losses.
When investors unwinding those dollar-carry trades and are left holding the greenback, they will question why they're holding the currency when the U.S. economy is "in shambles," he said. "At that stage, investors will massively buy gold and silver."
For now, investors are still interested in the dollar.
"Capital is fleeing from troubled currencies," said Phillips and Spina. "They turn to the dollar because it is the world's prime currency and one, at the moment, less in danger because of this role."
However, the fundamentals for the greenback are pointing to "trouble," Phillips and Spina warned. "When the crises really hit the dollar, all currencies ... of the monetary system [except China's yuan] will become volatile," he said.
As shown by the weakness in the euro, there are "structural dangers facing the paper currency system itself," they said. "The attempt by the eurozone to integrate so many of these politically, economically, culturally separate sovereign states was bound to suffer structural damage when a rough storm hit."
Now that the structural problems of the eurozone are exposed, "it is clear that both [the euro and dollar] face problems that should cause the gold price to rise," Phillips said in emailed comments.
Given that, "it is now in most nations' national interests to hold the gold they have in the face of the worst storm the currency system will ever see," Phillips and Spina said. "As a matter of prudence, gold is being acquired quietly, but in volume."
Still, some may even argue that the dollar and gold haven't really decoupled at all.
"I don't think gold is moving up with the dollar, though there are individual days when this does occur," said Mark Leibovit, chief market strategist for VRTrader.com.
Right now, he thinks gold is following a "cyclical pattern for weakness into possibly mid-March." Afterwards, he expects prices to stage a strong rally that may take gold to new highs this summer.
Ned Schmidt, editor of the Value View Gold Report, wasn't quite so optimistic. "In a world where U.S. dollars are becoming relatively rare, little reason exists for the value of the dollar to fall against other currencies," he said, emphasizing that he doesn't see any decoupling between the dollar and gold.
"No inflation in the U.S. and lack of money supply growth means no inflation will arise," so the dollar will not crash and gold "will have one more rally before hitting lows in the coming summer," he said.
Then again, it may be good idea for investors to buy, if gold hits those lows between now and summer.
"Lack of money supply growth in the U.S. will force the Federal Reserve to take action by fall," Schmidt said. "That will send gold to new highs."
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